The changing global environment presents a numberof challenges and opportunities for the Australianpharmaceuticals industry. If it responds effectively,the Australian industry will look significantlydifferent in ten years time. Currently, the industryemploys 40 000 people, exhibits an R&D intensityfour times that of the Australian manufacturingindustry, spends more than $860 million a year onR&D, has a turnover in excess of $18 billion andis Australia’s second largest manufactured exportprovider. To place this in context, in 2007 the globalpharmaceuticals market was estimated to be worthUS$712 billion with a total R&D spend of aroundUS$67 billion.Clearly, then, the sector is an important part of theAustralian economy. Unfortunately, the industry hasrecently experienced a decline in manufacturingvalue added and a low level of capital expenditurein comparison with turnover, which are indicationsthat the current Australian industry adds less1 Completed and announced closures as at 30 November 2008,based on information provided by companies to the Departmentof Innovation, Industry, Science and Research (Department ofInnovation).The shift to out-sourcing of innovation and earlystage R&D has resulted in continued expansionof the biotechnology sector, but this has been off-set by cost cutting resulting in global job lossesin the originator sector. These pressures areparticularly prominent in manufacturing (wherethey are associated with initiatives to centralise andupscale facilities in tax advantageous and low-costjurisdictions). Some MNCs have announced plansto significantly reduce their numbers of globalmanufacturing plants: moves that are affectingAustralian subsidiaries of MNCs. These pressureswill remain and Australian operations will continueto be affected by the global industry’s adjustmentto lower R&D productivity and the need to reducecosts. Significantly, the share of the Australianpharmaceuticals manufacturing involved in thehigher value adding segments of the supply chainhas declined during the past decade, from around80 per cent formulation to just 45 per cent, with thebalance replaced by packaging activities.Consolidation is also a feature of the genericsindustry, which is similarly searching for cost-effective locations and economies of scale inmanufacturing. This shift away from smaller scalelocalised generics manufacturing will also affectAustralia.These factors are being exacerbated by theglobal financial crisis, which has put furtherdownward pressure on the market value of manypharmaceuticals MNCs. The global financial crisisis likely to catalyse more intense global efficiencydrives. This will accelerate the closure of smallerxviiPharmaceuticalsINDUSTRY STRATEGY GROUP FINAL REPORTwill deliver net economic or social benefits toAustralia.Key drivers of investment in the Australian industryare:The changing nature of medicines and the •increasing role of converging technologies indeveloping a new class of therapeutic productsR&D• – quality of the scientific and medicalresearch base and infrastructure, and thestrength and balance of the intellectual property(IP) regimeClinical Trials – • ability to add value to the globaldrug development program, investigator initiatedclinical research proposals, and world-leadingAustralian clinicians (and centres of excellence)being sought for global advisory boardsEarly Stage – – quality of the scientific andmedical research base and infrastructure,availability of clinical trial sites (suitable forearly phase studies) and patients, speed ingaining regulatory approval to conduct theclinical trialLate Stage – – quality of the scientific andmedical research base and infrastructure,availability of clinical trials sites andclinicians, speed in gaining regulatoryapproval to conduct the clinical trial, ability torecruit larger patient numbers per site, cost,growth/value of the market in the countryand previous conduct of early phase trialswith the compound in the countryInvestment in Australian pharmaceuticalsmanufacturing operations is likely to decline asglobal rationalisation trends continue. This islikely to undermine the ongoing viability of mostpharmaceuticals manufacturing operations inAustralia and threaten to reduce Australia’spharmaceuticals manufacturing capacity. This willseverely constrain Australia’s capacity to exploit thecurrent specialised manufacturing capabilities inthe industry.Similarly, global rationalisation trends andemerging competition from low-cost centres willthreaten Australia’s long term competitiveness asa destination for pharmaceuticals clinical trials.According to a recent survey, 41 per cent of industryrespondents expect clinical trial activity in Australiato decline during the next five years, while another23 per cent expect activity to remain static.2Thenumber of clinical trials in Australia declined overthe twelve months from 2006-07 to 2007-08 andearly indications are that there will be even fewerclinical trials over 2008-09.3Until the local biotechnology sector matures andbuilds a strong track record of successful exitsfor investors, local biotechnology companies willcontinue to struggle to secure the funding requiredto develop their intellectual property, and muchof Australia’s promising medical science will becommercialised offshore. This is not a future that2 Survey in Pharmaceuticals Industry Council, Clinical R&D inAustralia: Innovation and Global Competitiveness, Report on the 3rdPharmaceuticals Industry Council R&D Taskforce Forum, Sydney,2-3 April 2008, <http://www.pharmacouncil.com.au/resources.php>.3 Therapeutic Goods Administration, Clinical Trial Notification data.Manufacturing – • scale, cost, skills, balanced andharmonised IP protection; quality, high valueadded manufacturing: quality, high level skillsand specialised production capability.Key barriers to investment in the Australianindustry are:Tax - • Australia’s corporate tax rate is higher thanthe Organisation for Economic Co-operationand Development (OECD) average and this is abarrier to increased investment, particularly inmanufacturingR&D – • lack of critical mass, infrastructure gapsand few globally significant companies fromwhich to develop global centres of discoveryR&DClinical Trials – • small population, increasingdifficulty in identifying and recruiting patients,declining cost competitiveness, decliningcompetitiveness in speed of study start-upManufacturing – • not cost competitive againstmany of Australia’s competitors and Australiadoes not offer the same levels of incentives asother jurisdictionsInvestment Capital• – the risk profile associatedwith biotechnology investments: a strongertrack record of success will build confidence inthe Australian investment communitySkills and Education• – a skills gap in job ready,highly skilled workers, including expertise incommercialisation and business management.xviiiPharmaceuticalsINDUSTRY STRATEGY GROUP FINAL REPORTReview), in so far as they impact on the industry andits capacity to undertake R&D, will provide supportthat will partially but not fully effect this transition.Similarly, the activities of the Review of AustralianHigher Education and the Review of Australia’s TaxSystem have the potential to assist but not completelyeffect this industry transition. Accordingly, furtherindustry-specific action is required.There are some aspects of the pharmaceuticalsenvironment where Government is the key agent—for example: in the regulations surrounding approvalof clinical trials, recruitment of patients, use andstorage of patient data; the importance given toresearch as a part of the public health system;and the size and design of university and academicresearch funding. Improvement and increasedfunding in these areas falls directly to Governmentand would be welcomed by the Group.In other areas, Government has an important rolein creating the right operating environment forcompanies to invest. This includes appropriatelevels of policy co-ordination between the AustralianGovernment Health and Innovation portfolios, astrong and balanced IP regime, and a competitivetaxation regime that creates a business environmentconducive to investment in both manufacturingand R&D.Finally, where it can be demonstrated that there is anopportunity for Australia to build on demonstratedglobal excellence or innovation, spillovers are large,and there are significant impediments to privateinvestment, there is a case for Government action.Kapanol® and Doryx® that have generated globalsales in excess of $100 million.4

Excellence in scientific and clinical research whileretaining the highest possible safety standardshas made Australia a competitive location not onlyfor R&D, but also for clinical trials, particularlyin the earlier phases. Australia has a competitiveadvantage as a location for Phase I and Phase IIclinical research. More Phase I and II activity is likelyto migrate to Australia over time, provided wecontinue to improve the Australian environment forclinical trials in the face of improving clinical trialcapabilities in other countries.Australia also has areas of expertise in specialisedmanufacturing that is largely responsible for theindustry’s strong export performance to date. TheGroup considers that Australia has the potentialto build on these strengths to create a sustainablefuture around high quality R&D, clinical trials andvalue added specialised manufacturing.The industry’s ability to make the transition to asustainable, globally competitive position will bedependent largely on the efforts of the companiesand workers of which it is composed. However, theAustralian Government will have a role to play inassisting industry to make this transition. The Groupconsiders that some of the recommendations of theReview of the National Innovation System (NIS4 Gardasil™ (cervical cancer vaccine), Relenza® (influenzaantiviral), Naglazyme® (treatment for rare genetic diseaseMucopolysaccharidosis type six), Kadian®/Kapanol® (pain relief),and Doryx® (anti-infective).These barriers to investment are limiting Australia’sability to capture the broader benefits that apharmaceuticals industry can provide. A sustainableAustralian pharmaceuticals industry offers:highly skilled, highly paid jobs•career opportunities to attract and retain a •highly skilled research workforcegreater social and economic benefits from •Australia’s investment in health and medicalresearchbetter health outcomes for patients, through •mechanisms such as faster access to newinnovative therapies and knowledge diffusion tocliniciansa significant contribution to building Australia’s •innovative and productive capacity.The Group considers that the key to a sustainablepharmaceuticals industry that adds value to theeconomy is in leveraging the industry’s knowledgebase, to deliver a sustainable and valuable annuity.Australia has a world class medical researchbase which produces three per cent of the world’smedical research—it punches ‘above its weight’.Scientific excellence is supported by extensiveinfrastructure in universities, medical researchinstitutes and hospitals. Australian science has alsobeen responsible for the development of a numberof important new medicines such as Gardasil™,Relenza® and Naglazyme® as well as improvedformulations and delivery systems such as Kadian®/xixPharmaceuticalsINDUSTRY STRATEGY GROUP FINAL REPORTthe Group recognises the value of the National •Collaborative Research Infrastructure Strategy,but considers the recommendations to increasefunding for R&D infrastructure will not providea strong incentive for companies to undertakesignificant investment in qualitatively differentprivate and multi-use infrastructure that wouldmake the industry more competitive in the longtermnone of the NIS Review’s recommendations •specifically address the skills gap in thepharmaceuticals industry, and more needsto be done to meet the skills gap by ensuringthat graduates have the necessary knowledge,skills and experience to make them ready for ajob in the pharmaceuticals industry (includingexpertise in commercialisation and businessmanagement) changes are also needed toimprove the mobility of personnel between thepublic and private sectorsthe NIS Review does not address changes that •are required to the operating environment tomake Australia a more attractive location forpharmaceuticals investment, including reformof the ethical approval processes for multi-centre clinical trialsthe NIS Review does not make recommendations •to encourage the type of high-value, strategicpharmaceuticals investment in manufacturingand R&D infrastructure that would helptransition the industry to a sustainable futureposition that provides an enduring benefit toAustralia.Government consideration of a range of •strategies to improve access to venture capitaland attract international venture capital funds toAustralia as the base for investment in the AsiaPacific region.Given the impacts of the global financial crisis, whichhave exacerbated the difficulties in securing capitalfor early stage R&D, the Group strongly supportsthe implementation of these recommendations asa matter of urgency.Smaller companies strongly support therecommendation for a refundable 50 per cent taxcredit. Some larger companies consider that thenon-refundable 40 per cent tax credit does notprovide sufficient incentive to attract additionalinternational investment.However, the Group does not consider that theseNIS Review recommendations are sufficient to fullyencourage the necessary industry development.Specifically:the combination of the • Competitive InnovationGrants Program, the Pre Seed Funds and a fourthround of the Innovation Investment Fund will stillleave a funding gap (for amounts >$10 million)for the smaller biotechnology/pharmaceuticalsdevelopment companies in Australia if alternativesources of capital (such as venture capital) areinadequate—this is particularly problematic inbiotechnology and pharmaceuticals because oflong development timesAccordingly, the Group believes that there is a rolefor Government in:maintaining Australia’s strong medical research •baseensuring that graduates have the appropriate •skills baseensuring the regulatory environment •appropriately supports high quality R&D anddoes not unduly obstruct clinical trial activityassisting companies to invest in new, qualitatively •different R&D, clinical trials and manufacturinginfrastructure that results in a sustainablecompetitive advantage, that will then generatesignificant net economic and social benefitsand a sustainable annuity to the Australianeconomy.In the process of considering its proposals, theGroup has considered the recommendationsof the report of the NIS Review. The Group hasconcluded that there are welcome and importantrecommendations from the NIS Review that willgo part of the way towards assisting the necessarydevelopment of the pharmaceuticals industry.Particular recommendations will encouragecompanies to invest in early stage R&D (which hassignificant public good spillovers) and should beimplemented by Government:introducing a • Competitive Innovation GrantsProgram to assist innovative companies withlimited access to capital in high risk, proof-of-concept and development stagesxxPharmaceuticalsINDUSTRY STRATEGY GROUP FINAL REPORT2. Increasing Australia’s attractiveness as alocation for clinical trials activity, by:accelerating the implementation of a national •streamlined system of ethics approval processesfor multi-centre clinical trials (including anational patient consent form)accelerating implementation of relevant e-health •initiatives: ensuring electronic medical recordsimplemented in Australian public hospitals arecompatible with industry needs for validationand access to clinical trial patient’s records byclinical trial monitors, especially in regard toallowing appropriately secure access for remotetrial monitoringestablishing co-ordinated national patient •referral networks, especially in therapeuticareas of high trial activity.The Group is cognisant that there are manycompeting claims for Government funding. It isimportant to ensure that any specific additionalfunding directed to the Australian pharmaceuticalsindustry is supported by clear evidence of expectednet economic and social returns to the Australiancommunity. Hence, in respect of the strategicinvestment fund, the Group believes that candidateprojects must show clear evidence that they willdeliver a sustainable annuity to Australia, forexample in the form of significant knowledge (orother) spillovers, development of value addingactivity in Australia that provides a sustainablecompetitive advantage, or a flow of returns likelyto be re-invested in Australian pharmaceuticalsactivity. The Group recommends that the Review ofAustralia’s Tax System consider reducing Australia’scorporate tax rate to make Australia a morecompetitive location for significant pharmaceuticalsindustry investment and consider whether supportfor business R&D through the corporate tax system,in addition to that proposed in the report of the NISReview, is justified.Current reviews will not sufficiently address issuesrelating to clinical trials, manufacturing and industryinfrastructure, and further Government interventionis required in these areas. Specifically, the Grouphas developed the following two proposals to boostinvestment in these areas.1. A strategic investment fund program that wouldprovide Government co-investment in strategicindustry projects that transition the industry toa sustainable position and deliver enduring netbenefit to Australia.This would include co-investment in expansionstage projects ($10-50 million) and large scalestrategic investment projects (>$100 million).The Government should considerimplementation of an economy-wide programthat can be accessed by all projects that meetthe stringent requirements for enduring netbenefit. In the absence of an economy-wideinvestment program the Group recommendsthat the Government consider an industry-specific program for the innovative biomedicalsciences industries.The Group concluded that Government action,beyond that proposed in the NIS Review, isnecessary if the pharmaceuticals industry is tohave a sustainable future in Australia, specificallyin relation to clinical trials, manufacturing andindustry infrastructure, taxation, and skills andeducation.The Group considers that, like many otherindustries, the environment for developing skillsand education for the pharmaceuticals industry canand should be improved, and has a material impacton the long term health of the industry. However,the Group notes that the Review of AustralianHigher Education is the appropriate mechanismfor Government to consider issues relating to skillsand education across the economy. The Grouprecommends that in considering its responseto the Review of Australian Higher Education,the Government examine ways to improvepharmaceuticals industry skills and education toreduce the skills gaps in the industry and betterpromote collaboration between the industry andthe research sector.Similarly, the Group is of the view that Australia’scurrent corporate tax regime is not competitive,especially for attracting large scale manufacturingfacilities. The Group also notes that Australia doesnot offer the same level of incentives as many othercountries to attract significant industry activity.However, the Group recognises that the Review ofAustralia’s Tax System is the appropriate forumfor considering changes to corporate tax and howthese could be used to attract significant industryxxiPharmaceuticalsINDUSTRY STRATEGY GROUP FINAL REPORTcontributing to Australia’s innovative and productivecapacity and helping to build a viable economy basedon low carbon pollution industries. The Group’sindustry members look forward to working with theAustralian Government to implement this strategicplan. In this way the pharmaceuticals industry canwork in partnership with the Australian Governmentto help meet Australia’s health, social and economicchallenges now and in the future.manufacturing or R&D. The onus should be uponthe project sponsor to provide evidence of this, andon the scheme to engage suitably skilled experts toassess its merits.The Group has considered the results of previousGovernment interventions in making theseproposals. The Group considers that the formalevaluations of previous Government interventionshave undervalued the broader benefits ofinvesting in pharmaceuticals R&D, manufacturingand infrastructure. These evaluations haveunderestimated the benefits because they onlymeasured the knowledge spillovers that accrued atthe half way point of previous programs and did nottake account of the full range of social benefits. Amore robust program evaluation methodology thatcaptured the long term benefits inherent in investingin R&D and sustainable value added infrastructurewould have shown a more positive result.The Group’s proposals form an integratedstrategic plan for attracting increased investmentin pharmaceuticals R&D, clinical trials andmanufacturing to Australia. Each part of theplan is an important component of creating theright operating environment for the industry toattract increased investment and make a greatercontribution to the economic and social welfare ofAustralia.A viable pharmaceuticals industry can play animportant role in meeting Australia’s challengesin providing the highest quality healthcare forthe whole community. It can also help Australiameet the economic challenges of the future by1PharmaceuticalsINDUSTRY STRATEGY GROUP FINAL REPORTThe Minister for Innovation, Industry, Science andResearch, Senator the Hon Kim Carr, establisheda high level industry-union taskforce to secure thefuture of the Australian pharmaceuticals industry.The taskforce, known as the PharmaceuticalsIndustry Strategy Group or the Group, wascommissioned to develop a plan to increaseinvestment in pharmaceuticals R&D, clinicaltrials and manufacturing in Australia over the nextdecade.The global pharmaceuticals business model ischanging because of industry consolidation inassociation with the increasing costs of drugdevelopment, the emergence of biologics, andoutsourcing of early stage R&D. Also, increasingpatent expiries and global cost-cutting strategiesto offset falling revenues in the face of increasingcompetition from generic drugs are creatingchallenges and forcing industry change. This shiftpresents both opportunities and challenges for theAustralian industry.1.1 TERMS OF REFERENCEMinister Carr announced the Terms of Referencefor the Group on 26 May 2008, which are shownin Box 1.1.5The Terms of Reference require theGroup to:examine the barriers and drivers to increasing •productive pharmaceuticals investment inAustraliaidentify strategies to overcome the impediments •and capitalise on opportunities to attractpharmaceuticals investment in Australiaexplain how these strategies will make a net •economic and/or social contribution to Australiaby 2010present a directions paper to the Minister by •30 September 2008 and a final report by the endof December 2008.5 Kim Carr (Minister for Innovation, Industry, Science and Research),The Roadmap to Pharmaceuticals Research and Manufacturing,media release, Parliament House, Canberra, 26 May 2008.1. introduCtion1.2 MEMBERSHIPThe Group has 24 members from all parts of thepharmaceuticals industry value chain. The Group isco-chaired by Dr Brian McNamee, Chief ExecutiveOfficer (CEO) and Managing Director (MD) of CSLLimited and Mr Craig Pennifold, Head of InnovationDivision, Department of Innovation, Industry,Science and Research (Department of Innovation).The Group’s other members are:Mr Nixon Apple, Industry and Economic Adviser, •Australian Manufacturers Workers UnionDr Graeme Blackman, MD, Institute of Drug •Technology Australia LimitedMr Dan Brown, MD, Genzyme Australasia •Pty LtdMr Ian Chalmers, CEO, Medicines Australia•Dr Greg Collier, CEO and MD, ChemGenex •Pharmaceuticals LimitedMr Peter Cook, CEO and MD, Biota Holdings •LimitedMr Richard Davies, MD, Amgen Australia Pty •Ltd2PharmaceuticalsINDUSTRY STRATEGY GROUP FINAL REPORTMr Joe de Bruyn, National Secretary and •Treasurer, Shop, Distributive and AlliedEmployees UnionMr Will Delaat, Chair, Pharmaceuticals Industry •CouncilMr Charlie Donnelly, National Secretary, National •Union of WorkersMs Alison Finger, MD, Bristol-Myers Squibb •Australia Pty LtdMs Di Ford, Executive Director, Generic Medicines •Industry AssociationMr Mitch Kirkman, Manager—Process, Training •and Quality, Novartis Pharmaceuticals AustraliaPty LtdMr John Latham, Regional Director, Pfizer •Global Pharmaceuticals, Pfizer Australia/PfizerNew ZealandDr Anna Lavelle, CEO, AusBiotech Ltd•Professor Graham Macdonald, Chair, •Pharmaceuticals Education CouncilMr John Montgomery, CEO, Alphapharm Pty Ltd •and President, Mylan Asia PacificMs Cait O’Connor, National Policy and Research •Officer, Australian Workers’ UnionDr Tim Oldham, President, Asia Pacific, Hospira •IncDr Alan Robertson, CEO, Pharmaxis Ltd•Box 1.1 Terms of Reference for the Pharmaceuticals Industry Strategy GroupThe Minister for Innovation, Industry, Science and Research has commissioned the Pharmaceuticals IndustryStrategy Group (PISG) to develop a strategic plan to increase investment in pharmaceuticals research anddevelopment (R&D) and manufacturing in Australia over the next decade.The Australian pharmaceuticals industry is defined as all those who contribute to the discovery, creation andsupply of pharmaceutical products and services, including prescription medicines and vaccines. It covers fromresearch through clinical trials, to manufacturing of pharmaceuticals. It includes the originator medicinesector, the generic medicine sector and the medical biotechnology sector.The pharmaceuticals industry is highly globalised and is undergoing a period of global rationalisation that willimpact on the sustainability of the Australian industry.The Pharmaceuticals Industry Strategy Group (PISG) will:1. Examine the drivers and barriers to increasing productive investment in R&D, clinical trials andmanufacturing activity in Australia. In doing so, the PISG can take into account the impact of, but is notrequired to report on, regulatory and reimbursement systems such as the Therapeutic Goods Administrationand the Pharmaceutical Benefits Scheme.2. Identify strategies to overcome the impediments and capitalise on the opportunities to attract investmentin R&D, clinical trials and manufacturing activity in Australia that:a) Builds on Australia’s competitive strengths;b) Identifies the actions that industry and Government should take to:i) increase manufacturing activity and investment in manufacturing infrastructure; andii) increase R&D activity and investment in R&D infrastructure;c) Provides a well reasoned business case (consistent with principles of appropriateness, effectiveness,efficiency, integration, performance assessment and strategic policy alignment) for how anyproposed actions will attract new, internationally competitive and sustainable R&D, clinical trials andmanufacturing investment to Australia together with an implementation timetable and key performanceindicators; andd) Explains how the actions would make a net economic and/or social contribution to Australia by 2020.3. Report to the Minister for Innovation, Industry, Science and Research with a draft directions paper by30 September 2008 and a final report by the end of December 2008.3PharmaceuticalsINDUSTRY STRATEGY GROUP FINAL REPORTThe RevIew of The NaTIoNalINNovaTIoN SySTemOn 22 January 2008, Minister Carr announceda review of the National Innovation System (NISReview) to be undertaken by an expert panel chairedby Dr Terry Cutler. Minister Carr asked the panelto:identify a set of principles to underpin the •role and participation of the public sector ininnovationdevelop a set of national innovation priorities to •complement the national research priorities,ensuring the objectives of research programs andother innovation initiatives are complementaryidentify regulatory and other barriers to •innovation and recommend ways to minimisetheseexamine the scope for simplifying and reducing •program duplication and ensuring that anysupport provided is well-targeted and easy toaccessconsider the appropriateness, effectiveness •and efficiency of the R&D tax concessionscheme in promoting innovation and makerecommendations to improve innovationoutcomesconsider ways to improve the governance of the •national innovation system to support higherexpectations of government agencies andindustryDr Merilyn Sleigh, CEO, In Avanti•Mr Ken Windle, Chairman & CEO, Advent •PharmaceuticalsPrevious members were:Mr Simon Efron, former National Policy and •Research Officer, Australian Workers’ Union—Mr Efron was replaced by Ms O’ConnorMr Dave Oliver, National Secretary, Australian •Manufacturing Workers Union—Mr Oliver wasreplaced by Mr Apple.1.3 RELATIONSHIP WITHOTHER GOvERNMENTREvIEWSThe Group is conducting its work at the same time asa number of other significant reviews commissionedby the Australian Government. These other reviewsinclude:The Review of the National Innovation System•The Review of Australia’s Export Policies and •ProgramsThe Review of Australian Higher Education•The Review of Australia’s Tax System.•assess the appropriateness, effectiveness and •efficiency of the Cooperative Research Centres(CRC) Program and make recommendations toimprove innovation outcomes.6Minister Carr released the NIS Review,venturousAustralia, on 9 September 2008.7Itcontains many recommendations of relevanceto this report and these are further discussed inChapter 5.The RevIew of exPoRT PolIcIeSaNd PRoGRamSOn 21 February 2008, the Minister for Trade, the HonSimon Crean MP, commissioned Mr David MortimerAO and Dr John Edwards to review Australia’sexport policies and programs. The review assessedAustralia’s export and investment performance andlooked at future policies and programs to promoteexports and investment flows, develop exportcapacity, and enhance Australia’s competitiveness.8

The RevIew of auSTRalIaNhIGheR educaTIoNOn 13 March 2008, the Deputy Prime Minister andthe Minister for Education, Minister for Employmentand Workplace Relations, and Minister for SocialInclusion, the Hon Julia Gillard MP, announced amajor review of Australia’s higher education systemwhich would examine and report on the futuredirection of the higher education sector, its fitnessfor purpose in meeting the needs of the Australiancommunity and economy and the options for ongoingreform.15The review was conducted by EmeritusProfessor Denise Bradley AC, who presented a finalreport to Minister Gillard in December 2008.14 The Group discussed a proposal to allow generic medicines to bemanufactured in Australia during the period of Australian patentextension for export to third markets where the relevant patents havealready expired. However, as consensus could not be reached onwhether this proposal could be implemented without diminishing thecommercial protection offered to patent holders or without conflictingwith international treaty obligations, this issue will be addressedoutside the work of the Group.15 Julia Gillard (Deputy Prime Minister, Minister for Education, Ministerfor Employment and Workplace Relations and Minister for SocialInclusion), A Higher Education Revolution: Creating a Productive,Prosperous, Modern Australia, speech, Australian Financial ReviewHigher Education Conference, Canberra, 13 Mar 2008.2. opening up export and investment opportunitiesby removing impediments and distortionsimposed in offshore markets3. enhancing market development through exportand investment facilitation programs that reflectthe contemporary needs of the internationalisedbusiness sector, including targeted marketdevelopment strategies4. improving coherence and co-ordinationbetween all levels of government to ensure theefficient and effective deployment of effort andresources.12The Group is broadly supportive of these pillars andconsiders that the adoption of this framework willhelp to sustain the industry’s recent impressiveexport performance.The EMDG scheme is the Australian Government’sprincipal financial assistance program for aspiringand developing exporters. The scheme targetssmall and medium-sized enterprises across allsectors of the Australian economy. The Review of thescheme found that it was effective and efficient andsuccessful in addressing information deficiencies.Economic modelling indicates that each dollarof EMDG generates $13.50 to $27 of exports andthat the EMDG has a small, positive net benefit.13

The EMDG is potentially a useful mechanism formany small and medium-sized enterprises in the12 David Mortimer, Winning in World Markets: Meeting the CompetitiveChallenge of the New Global Economy—Review of Export Policies andPrograms, Canberra, 2008.13 Mortimer, Review of the Export Market Development Grants Scheme,2008.As Australia’s second largest manufacturingexport, government policies regarding thedevelopment of exports are relevant to theAustralian pharmaceuticals industry. The Reviewof the Export Market Development Grants (EMDG)scheme describes a nation’s export performanceas a measure of the capacity of its industriesto successfully compete internationally.10Thereis evidence to suggest that export industriesand successful exporters within industries havehigher productivity levels than those focused onlyon the domestic market. This is largely becauseinternational competition is the most commonway in which new technologies, managementand marketing techniques, and business stylesare discovered, adapted and incorporated.11

This suggests that Australian pharmaceuticalscompanies that undertake export activity willbecome increasingly productive and betterpositioned to withstand external shocks.The Review of Export Policies and Programsconcluded that the challenges facing Australiarequire a new and national export and investmentstrategy. It recommends that the new strategy bebased on the following four pillars:1. improving Australia’s internationalcompetitiveness and diminishing theimpediments to export capacity that are imposedwithin Australia10 David Mortimer, Winning in World Markets: Meeting the CompetitiveChallenge of the New Global Economy—Review of the Export MarketDevelopment Grants Scheme, Canberra, 2008.11 Mortimer, Review of the Export Market Development Grants Scheme,2008.5PharmaceuticalsINDUSTRY STRATEGY GROUP FINAL REPORT1.5 METHODOLOGY USEDTO ADDRESS THE TERMS OFREFERENCEThe Group met six times: 7 July, 11 August,19 September, 24 October, 19 November and5 December 2008, to address the terms of reference.To do this, the Group:articulated its vision for where the industry will •be in 2020conducted a SWOT—strengths, weaknesses, •opportunities and threats—analysis of theindustryconsidered the impact of previous industry •development programsconsidered the implications of Australia’s World •Trade Organization obligations on future industrydevelopment program optionsanalysed submissions to the NIS Review from •relevant stakeholdersconsidered the relevant recommendations of •the report of the NIS Reviewdeveloped proposals to stimulate growth of the •industry and business cases to justify theseproposalspresented the • Pharmaceuticals Industry StrategyGroup Directions Paper (Directions Paper) to1.4 WHY HAvE APHARMACEUTICALSINDUSTRY REvIEW NOW?The Australian pharmaceuticals industry issignificant: it employs more than 40 000 people,has a turnover in excess of $18 billion, producesexports valued at $3.9 billion and invests morethan $860 million in R&D a year.17It is a significantcomponent of the National Innovation System, andAustralia’s second largest source of elaboratelytransformed manufactured goods for export.However, the environment in which thepharmaceuticals industry operates has changeddramatically over the past decade, and a full and frankassessment of the current and future challengesand opportunities facing the industry is needed.This assessment is particularly timely consideringthat the current industry development program,the $150 million Pharmaceuticals PartnershipsProgram (P3) will conclude on 30 June 2009.This review will examine the challenges andopportunities facing the industry and also proposeactions that both Government and industry can taketo maximise investment in the industry over the nextdecade, including whether or not there should be asuccessor program to P3, and if so, what it shouldlook like.17 Australian Bureau of Statistics (ABS), unpublished data; IBISWorld,Medicinal and Pharmaceutical Product Manufacturing in Australia:C2543, 2008; IBISWorld, Pharmaceuticals Wholesaling in Australia:F4797, 2008.The RevIew of auSTRalIa’S TaxSySTemOn 13 May 2008, the Treasurer, the Hon Wayne SwanMP, announced the review of Australia’s tax system.The review will look at the current tax system andmake recommendations to position Australia todeal with the demographic, social, economic andenvironmental challenges of the 21st century.16

This review will be undertaken by Dr Ken Henry,Secretary of the Department of the Treasury andwill report to the Australian Government by the endof 2009.The Group considers that each of these reviewsis important to the future competitiveness of theAustralian pharmaceuticals industry and thatparticular issues will need to be progressed aspart of each of these reviews if the industry is toachieve its potential. These issues are exploredin more detail in Chapter 5. The Group will not bepresenting recommendations to Minister Carr thatare considered likely to encroach on any of thesereviews’ terms of reference. Rather it will note theimportance of these matters to the industry andthe need for these matters to be considered eitherin the context of these reviews or the AustralianGovernment’s response to these reviews. This willallow the views of the Group to inform the AustralianGovernment’s response to these reviews.16 Wayne Swan (Treasurer), Australia’s Future Tax System, mediarelease, Parliament House, Canberra, 13 May 2008.6PharmaceuticalsINDUSTRY STRATEGY GROUP FINAL REPORTan analysis of the short term and long term •impacts of the global financial crisis on theindustry (see Chapter 2)an overview of previous Australian Government •programs and initiatives (see Chapter 3 andAppendix C)a discussion of the barriers and drivers to global •and Australian industry activity and what thefuture industry will look like (see Chapter 4)a strategic framework for how the industry will •achieve a sustainable future (see Chapter 5)a framework for determining the basis for •Government intervention in the pharmaceuticalsindustry and how net economic and socialbenefits will be generated (see Chapters 5 and 6and Appendices E and F)recommendations to achieve a sustainable •future (see Chapter 7).a strategic framework for how the industry will •achieve a sustainable futurethree recommendations to achieve a sustainable •future.20Following the release of the Directions Paper, theGroup has consulted more widely within the industryon recommendations in the Directions Paper andfurther considered how these recommendations:would deliver a net economic and social benefit •could be implemented•could be integrated within the Australian •Government’s broader strategic policy agenda.A list of the 21 stakeholders that provided commentson the Directions Paper is provided at Appendix D.1.7 STRUCTURE OF THEFINAL REPORTThe Group considers that much of the analysisundertaken in the Directions Paper remains relevantand has decided to maintain much of this analysisin the Final Report to provide a comprehensiveanalysis of the factors that will shape the future ofthe industry.The Final Report will provide:an overview of the global and Australian •pharmaceuticals industries (see Chapter 2 andAppendices A and B)20 Pharmaceuticals Industry Strategy Group, Pharmaceuticals IndustryStrategy Group Directions Paper, Canberra, 2008.Minister Carr in September 2008, which wasreleased for public comment in October 200818considered the 21 submissions made in response •to the Directions Paperconsulted with industry stakeholders•refined the recommendations and associated •business casesdeveloped this Final Report. •The Group also held two teleconferences on5 September and 9 September 2008 to help refinethe proposals to stimulate the growth of theindustry.1.6 THE DIRECTIONS PAPEROn 30 September 2008, the Group presentedthe Directions Paper to Minister Carr, whichthe Minister subsequently released publicly on20 October 2008.19The Directions Paper provided:an overview of the global and Australian •pharmaceuticals industriesan overview of previous Australian Government •programs and initiativesa discussion of the barriers and drivers to global •and Australian industry activity18 Pharmaceuticals Industry Strategy Group, Pharmaceuticals IndustryStrategy Group Directions Paper, Canberra, 2008.19 Kim Carr, Pharmaceuticals Industry Strategy Group: Draft PaperReleased, media release, Parliament House, Canberra, 20 Oct 2008.7PharmaceuticalsINDUSTRY STRATEGY GROUP FINAL REPORT2.1 THE PHARMACEUTICALSINDUSTRY vALUE CHAINThe pharmaceuticals industry is defined as all thosewho contribute to the discovery, creation and supplyof pharmaceuticals products and services, includingprescription medicines and vaccines. The stagesof the value chain include discovery research, andbasic R&D, through to clinical trials, and then themanufacturing of pharmaceuticals. It includes theoriginator medicine sector, the generic medicinesector and the medical biotechnology sector.2.2 PHARMACEUTICALSINDUSTRY SECTORSCompanies in the pharmaceuticals industry arediverse and multi-faceted, and they use a varietyof technologies to develop medicines for globalmarkets. Nevertheless, most companies involvedin or aspiring to sell medicines generally fit withinfour different business models:developers and/or manufacturers of originator •small molecule medicinesdevelopers and/or manufacturers of originator •biological medicinesresearch based biotechnology companies•developers and manufacturers of generic •medicines.Other companies are also involved in servicingthe development and manufacturing needs of thesector by offering contract manufacturing, clinicaltrials, and R&D services.Many of the challenges and characteristics of thepharmaceuticals industry—those companies that fitinto these broad categories—also apply to a broaderset of businesses involved in medical science. Theseinclude, for example, companies involved in medicaldevices, diagnostic products, biomarkers and othertherapeutic products.oRIGINaToR Small moleculecomPaNIeSThese companies earn most of their revenue fromdeveloping and selling new medicines based onsmall molecules (or chemically based drugs),including radiopharmaceuticals. Both globally andin Australia this is the largest sector of the industryby revenue and profitability. Because of the cost andtime to market for new products and the low-costand relative ease and consistency of manufacture, a2. overview of the global andAUSTRALIAN PHARMACEUTICALS INDUSTRYstrong and effective intellectual property protectionregime is critical to this sector.Globally this sector is the largest employer inthe industry and the biggest investor in R&D. Itsmanufacturing activities are characterised by adiverse network of global manufacturing facilitiesthat supply all regions.21R&D facilities for eachcompany generally comprise of a handful of globalcentres of excellence for discovery that are generallylocated in Western Europe, North America andJapan and that are supported by a large number ofclinical trial sites located around the world.This sector has the most extensive sales andmarketing network of the industry and is able to sellto all major markets. The cost of developing a newmedicine increases dramatically as the moleculemoves from research into preclinical development,and then through the phases of clinical development.Most notably, spend on the global clinical program isoften the major component of the total developmentspend. These funds will flow into countries thatcan deliver clinical trial data in a timely and costcompetitive manner with appropriate quality.21 Note that there has been considerable centralisation, consolidationand increased scale in manufacturing in the sector, driven by theneed to reduce costs and increase margins.8PharmaceuticalsINDUSTRY STRATEGY GROUP FINAL REPORTstrong and sustained growth. A key opportunityand challenge for this sector is having a regulatoryand reimbursement framework that recognisesthe complexity of biologic medicines. Also requiredis a framework that ensures these medicines canaccess markets in a timely fashion (market accessis also a key issue for originator small moleculecompanies), with reimbursement that reflects thecosts of development.One of the challenges of the Group was to identifyways in which Government can most effectivelyprogress this issue in a way that sees Australiatake full advantage of this as an opportunity for theAustralian community to access innovative therapiesand also to position the nation as a pro-innovationdestination for industry investment.ReSeaRch BaSed BIoTechNoloGycomPaNIeSResearch based biotechnology companies operateacross the full range of the pharmaceuticals sector,with technologies and products in both the smallmolecule and biologics spaces. Many companies inthis sector have promising if limited developmentpipelines, but most have not yet developed a finishedproduct, and indeed may not intend to do so. In thesecases, the companies are generally not profitableand might not have a predictable and consistentrevenue stream from product sales to sustain theiractivity. They rely on a combination of governmentgrants, licensing deals with other companies, andcapital markets to finance their operations.oRIGINaToR BIoloGIcS comPaNIeSOriginator biologics companies focus on developingnew biologic medicines. Many biotechnologycompanies are found within this sector, althoughthis group of companies has additional challengesas discussed below. The percentage of medicinesmade from biologics is set to increase, with someestimates indicating a rise from 18 per cent in 2006to 27 per cent in 2012.23Like the originator smallmolecule sector, a strong system of intellectualproperty protection is critical for this sector,particularly as the knowledge and skills needed tomanufacture biologics become more widespread.However, unlike the originator small moleculecompanies, most of these companies have been inbusiness for less than 30 years and have developedin conjunction with the rise of biotechnology. Manyof these companies have spun out of knowledgeintensive precincts and remain in close proximity tothese locations.The majority of these companies are highly R&Dintensive, have no more than a handful of productsand specialise in a small number of therapeuticareas. Globally these companies tend to becharacterised by strong drug development pipelines(relative to their marketed products), and comparedwith the originator small molecule sector, theyface less generic competition24, less pressure torationalise and are still exhibiting23 ‘Report finds poor management scuppers almost half of all licensingdeals’, Scrip, no. 3330, 25 Jan 2008, p. 11.24 Although, competition is emerging with ‘biosimilar’ versions ofproducts like human growth hormone, which are already available.This sector remains large and profitable, however, itis under considerable pressure with the impendingpatent expiration on major blockbuster drugs (suchas Pfizer’s atorvastatin22), falling R&D productivity—raising the cost and difficulty of replenishingpipelines—increasing regulatory pressure, growinggeneric competition, and increasing pressure onreimbursement. This is translating into globalrationalisation and globally significant job losses.In response, originator small molecule companiesare exploring new structural models of R&D toimprove productivity and to accommodate theincreasing requirement for demonstration of thecost-effectiveness of expensive new medicines.The Australian operations of these companiesare not immune from these pressures. Part ofthe focus of the Group’s work is on developingstrategies to identify how Australian companiesand divisions of multinational corporations (MNCs)can capitalise on the effects of these changes, or ata minimum survive. Other key challenges for thissector include a predictable and timely regulatoryand reimbursement system that promotes effectivemarket access and competition from low-costcentres for clinical trials and manufacturing. Thesecompanies have been very successful in attractingglobal clinical trials, and the associated global spend,into Australia over the last twenty years. However,the ability of Australia to retain this level of globalspend is under intense threat, especially from fastgrowing markets—such as India and China—withlower costs and ever increasing quality.22 Brand name Lipitor®.9PharmaceuticalsINDUSTRY STRATEGY GROUP FINAL REPORTexpire, and remaining competitive against lower costmanufacturing centres. The challenge of examiningstrategies to make Australian manufacturing morecompetitive against lower cost competitors wasa key focus for the Group, for example by findingspecialties that are difficult for others to replicate.More information on each sector of the industry anda comprehensive description of the industry valuechain is at Appendix A.2.3 THE GLOBALPHARMACEUTICALSINDUSTRYThe pharmaceuticals industry is global in scope,with a value chain that is similarly global: promisingresearch is sourced from wherever it emanates;pre-clinical research is generally conducted insuitably scaled units located close to head officesor large commercial business units; clinical trialsare conducted at appropriately qualified hospitalsand research centres around the world, placing apremium on speed, cost and quality; medicines aredeveloped for global markets and manufacturedfrom global networks of large scale productionsites for international markets. There is intensecompetition for capital, for skilled resources, andfor research prospects that have the potential tobecome useful medicines.activities, regulatory compliance and managing thelegal and IP issues necessary to secure the earliestpossible market access. The R&D done by thissector has lower levels of technical risk than theR&D undertaken by the originator sector, however,it does conduct some R&D including provingbio-equivalence (the ability of a new version of amedicine to have equivalent strength and activityof the originator medicine) and the development ofnew drug formulations and delivery mechanisms.In Australia, companies such as Hospira andAlphapharm make significant investments in thistype of R&D. An increasing amount of genericcompany R&D is spent on developing newformulations and improved processes.Generic medicines companies are in the middle of anunprecedented growth opportunity arising from thelarge number of patent expirations of high revenuemedicines. This is giving the sector access to largerand more lucrative markets. Manufacturing genericmedicines requires the same skills as manufacturingoriginator medicines but it does not require thesame types of IP protection. Therefore, competitionfor generic manufacturing is more intense andtakes place in a greater number of locations. Oneconsequence of the intense competition betweengeneric companies is increasing consolidation andadoption of large scale, low-cost manufacturingoperations in low-cost jurisdictions—a measurethat is necessary to preserve margins.The key challenges for this sector are a predictableand timely regulatory and pricing system, beingable to gain access to markets as soon as patentsThose companies that have developed productshave often outsourced (or out-licensed) themarketing and manufacturing of these products toconcentrate on their core business of researchingand developing new medicines. These companiesare highly innovative, invest a large portion of theircash reserves on R&D, tend to specialise in discreteareas of technological sophistication and pursueunique technological platforms. An appropriateintellectual property regime is of vital concern tothis group, as is a streamlined environment forclinical research.Australia has approximately 470 companies thatoperate in this sector. They account for a significantportion of total industry investment in Australia andgenerally have strong links to the medical researchcommunity. A key challenge for this sector isaccessing the skills and capital required to advanceits drug development portfolio and to manage thetransition into later stage development towardsproduct launch and sales. One of the challengesfor the Group was to explore ways in which thissector can overcome its resourcing constraints.Biotechnology companies also require sophisticatedassistance with business development, productdevelopment, and related skills.GeNeRIc medIcINe comPaNIeSGeneric medicine companies specialise in theproduction of medicines that have come off patent(which are predominantly small molecules, althoughthere is also growing interest in biosimilars), andare focused primarily on manufacturing, marketing10PharmaceuticalsINDUSTRY STRATEGY GROUP FINAL REPORTjob cuts of almost 400 employees in the lasttwelve months. These pressures will remain whileAustralian operations continue to be affected bythe global industry’s adjustment to lower R&Dproductivity and the need to reduce costs.These changes are fundamentally redefining theindustry business model from one hitherto basedon vertical integration, to one based increasingly onvirtual integration, characterised by partnering atmultiple points within the development chain withservice providers, research based biotechnologycompanies, universities and medical researchinstitutes, and diversification by several largeoriginator pharmaceuticals companies intogenerics.Australia is particularly well placed to exploitthis trend. Australia has the world’s sixth largestbiotechnology industry with 470 biotechnologycompanies who can act as drug discovery anddevelopment partners for larger pharmaceuticalscompanies. Many Australian companies have beensuccessful in establishing lucrative relationshipswith MNCs: recent examples include Cytopia’s$274 million drug development deal with Novartisand Bionomics’ $50 million deal with MerckSerono.The trend towards outsourcing means, inparticular, that the research-based sector willplay an increasingly important role as a source ofinnovation. This implies that Governments aimingto create an environment that is conducive toindustry innovation will need to focus increasinglyon enhancing the research sector.However, these strategies have not led to an increasein R&D productivity by the MNCs. The number of newproducts approved in 2006 was lower than in 1995,despite the industry spending three times as muchon R&D in 2006 as in 1995.26Credit Suisse Researchestimates that in 1980 the industry developedalmost 17 new medicines for every billion dollarsof R&D spent. By 2000 every billion dollars of R&Dspent produced a little more than one marketed newmedicine. This estimate could be somewhat inflatedby a focus on MNCs developing blockbuster drugs.The situation has led, however, to an expectation ofsharply reduced growth in future revenues for thissector of the industry and a substantial reductionin the value of pharmaceuticals companies to theirshareholders.27Revenue pressures and consolidation in the MNCsector are leading to global job losses across thevalue chain, but they are particularly prominentin manufacturing (where they are associated withinitiatives to centralise and upscale facilities in taxadvantageous jurisdictions) and in sales forces.A number of companies have announced plansto significantly reduce their numbers of globalmanufacturing plants. Australian subsidiariesof MNCs are affected by these pressures, with anumber of companies announcing manufacturing26 United States Government Accountability Office, New DrugDevelopment: Science, Business, Regulatory and IntellectualProperty Issues Cited as Hampering Drug Development Efforts,2006; statistics on R&D spend from Pharmaceutical Research andManufacturers of America (PhRMA), Pharmaceutical Industry Profile2008, Washington DC, March 2008.27 A Lewcock, ‘Pharmas to lose $100bn to generics’, DrugResearcher.com, news article, 22 Feb 2007, <http://www.drugresearcher.com>.GloBal INduSTRy TReNdSFor most of the last three decades, thepharmaceuticals business model has been based onvertically integrated MNCs developing blockbustermedicines from in-house resources. During the past